2018 Medicare changes will erase Social Security COLAs for many

Some high earners could keep the full value of their COLAs and see no change to their Medicare premiums

The Centers for Medicare & Medicaid Services (CMS) announced Friday that the standard monthly premium for Medicare Part B, which covers outpatient services and doctor's bills, will remain at $134 per month in 2018.

While it may seem counterintuitive, keeping the standard Medicare B premium at 2017 levels will result in a 23% increase in monthly Medicare bills for most retirees next year. That's because 70% of Medicare enrollees, who are protected by a so-called "hold harmless" provision, are currently paying $109 per month for Medicare Part B.

Medicare Part B premiums are usually deducted directly from monthly Social Security benefits. The "hold harmless" provision prohibits annual increases in Medicare Part B premiums from exceeding the dollar amount of Social Security annual cost-of-living adjustments (COLAs) to prevent a net decline in Social Security benefits from one year to the next.

Because of low inflation over the past two years, most retirees benefitted from the "hold harmless" provision.

There was no COLA in 2016, meaning there was no increase in Medicare premiums for most people. A small 0.3% COLA in 2017, which boosted average Social Security benefits by about $5 per month, held Medicare premium increases to about $5 per month.

2018 CHANGES

But 2018 will be different. Thanks to a 2% increase in Social Security benefits announced last month, average retirement benefits will increase enough to accommodate the $25 hike in monthly Medicare premiums next year.

Average Social Security benefits for retired workers will increase $27 per month to $1,404 per month in 2018, up from $1,377 this year. As a result, higher Medicare premiums will virtually wipe out any increase in Social Security benefits for many retirees next year.

But some higher-income retirees could fare better. The maximum Social Security benefit for high earners will rise by $101 per month to $2,788 per month in 2018 and will be only partially offset by higher Medicare premiums—unless they are subject to a high-income surcharge.

Not everyone is protected by the "hold harmless" provision. About 30% of Medicare enrollees in 2017 are already paying $134 per month—or more—for their Medicare Part B premiums. They include Medicare beneficiaries who do not receive Social Security benefits, those who are billed directly for their Medicare Part B premiums, those who enrolled in Medicare for the first time in 2017 and those who pay a high income-related premium.

Ironically, those who are already paying $134 per month for Medicare Part B will see no increase in their Medicare premiums next year so they will enjoy the full benefits of their Social Security cost-of-living adjustment.

IRMAA SURCHARGES

Since 2007, beneficiaries with higher incomes have paid higher Medicare Part B monthly premiums. These income-related monthly adjustment amounts, also known as IRMAA surcharges, apply to individuals whose modified adjusted gross income (MAGI), which includes tax-free interest, exceeds $85,000 and married couples with MAGIs that top $170,000. In 2018, Medicare premiums will be based on 2016 tax returns which were filed this year.

There are five income tiers that determine Medicare premiums. Individuals and married couples in the first tier with incomes below the $85,000/$170,000 threshold in 2016 will pay $134 for Medicare Part B premiums next year. The surcharges applied to the upper four income tiers next year will remain the same as in 2017, but the income amounts that trigger some of those surcharges will change.

Individuals with incomes between $85,000 and $107,000 and married couples with incomes between $170,000 and $214,000 in 2016 will pay an additional surcharge of $53.50 per month for a total Medicare Part B premium of $187.50 per month per person in 2018.

TIER COMPRESSION

Beginning next year, the third income tier will be compressed, meaning some people who paid an IRMAA surcharge in 2017 may pay even more next year even if their income remains the same. The new income tiers affect individuals with incomes above $133,500 and married couples with incomes above $267,000.

Individuals with incomes between $107,000 and $133,500 and married couples with incomes between $214,000 and $267,000 in 2016 will pay an additional surcharge of $133.90 per month for a total Medicare Part B premium of $267.90 per month per person in 2018.

Individuals with incomes between $133,500 and $160,000 and married couples with incomes between $267,000 and $320,000 in 2016 will pay an additional surcharge of $214.30 per month for a total Medicare Part B premium of $348.30 per month per person in 2018.

The top tier affects individuals with incomes that exceed $160,000 and married couples whose joint income exceeds $320,000 in 2016. Previously, the top tier started at $214,000 for individuals and $428,000 for married couples. Those in the top tier will pay an additional surcharge of $294.60 per month for a total Medicare Part B premium of $428.60 per month per person in 2018.

PRESCRIPTION PLANS

Medicare Part D prescription drugs plans are also subject to high-income surcharges based on the same income tiers, but there is no "hold harmless" protection to prevent a net decline in Social Security benefits. The Part D surcharges were announced earlier this year. The base premium amount for prescription drug plans vary widely.

Medicare beneficiaries with incomes at or below the threshold amounts of $85,000/$170,000 in 2016 will pay the standard premium for their Part D plans directly to the insurance provider next year. Those will higher incomes will pay a monthly high-income surcharge to the federal government.

The monthly per person surcharges for Medicare Part D in 2018 are as follows: $13.00 for individuals with incomes of $85,001 to $107,000 (for couples, $170,001 to $214,000); $33.60 for individuals with incomes of $107,001 to $133,500 (for couples, $214,001 to $267,000); $54.20 for individuals with incomes of $133,501 to $160,000 (for couples, $267,001 to $320,000); and $74.80 for individuals with incomes above $160,000 (for couples, above $320,000).

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